The Tax Foundation is the nation’s leading independent tax policy nonprofit. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and global levels. For over 80 years, our goal has remained the same: to improve lives through tax policies that lead to greater economic growth and opportunity.

Another U.S. Company Moves to Ireland for Tax Reasons

February 19, 2014

William McBride

William McBride

The long goodbye to U.S. corporations continues. The pharmaceutical company Actavis, which last year moved from New Jersey to Ireland, has announced it is buying Forest Labs of New York for $25 billion. The new company will be based in Ireland, where the corporate tax rate is 12.5 percent – much lower than the combined U.S. federal and state corporate tax rate of 40 percent or more in New York and New Jersey. Actavis moved to Ireland last year by taking over Warner-Chilcott of Ireland, which was also once based in New Jersey. The New York Times has more:

This was the first major deal Actavis announced since completing its takeover of Warner Chilcott last year for about $5 billion. That deal expanded Actavis’s presence in specialty pharmaceuticals, and also allowed it to complete a so-called tax inversion, relocating its headquarters to Ireland and escaping the American tax regime.

One big advantage of tax inversions, besides a lower statutory tax rate, is that deals can become more affordable. Once inverted, companies can more easily use overseas cash to pay for a deal, and the earnings from any acquired company are also taxed at the company’s new, lower rate.

In this case, Forest’s earnings, which had been getting taxed at a higher United States rate, will eventually be taxed at the lower Irish rate currently paid by Actavis, which executives estimated to be 16 percent. Tax savings will amount to at least $100 million, the companies said.

“The inversion probably was the factor that made the acquisition possible,” said Robert Willens, a corporate tax adviser. “By offering the benefits of a lower tax rate, Actavis made itself a very attractive suitor, and one that has a huge advantage over U.S. suitors.”

New Jersey has a high state corporate tax rate, at 9 percent. Lowering it would help retain the remaining pharmaceutical companies, such as Merck and Johnson & Johnson. But the real problem is the federal corporate tax rate of 35 percent, which is made worse by the fact that the U.S. applies that tax rate to foreign earnings as well as domestic earnings. Most countries have much lower corporate tax rates and also largely exempt foreign earnings from domestic taxation, i.e. they tax on a territorial basis. This is why U.S. companies are moving to low-tax countries such as Ireland, rather than low-tax states such as Texas.

More specifically, Forest Labs does not have to move the entire company to Ireland to obtain the low Irish tax rates. They can, and probabably will, keep most of the company in New Jersey, and only move the headquarters to Ireland for tax purposes. What makes the deal so attractive is that Forest Labs probably gets a large share of their earnings from abroad, i.e. outside of both the U.S. and Ireland. Those foreign earnings have been subject to the U.S. federal corporate tax rate of 35 percent plus applicable state corporate taxes. The U.S. allows a credit for any foreign taxes paid. Say Forest Labs pays an average of 25 percent to foreign governments in corporate taxes. That means Forest Labs (prior to this merger) owed the U.S. government an additional 10 percent (35 minus 25 percent) in corporate taxes. That extra 10 percent "repatriation tax" disappears over night as a result of this deal. That's because even though Ireland has a worldwide tax system with foreign tax credits (like the U.S.), their much lower corporate tax rate of 12.5 percent is below the foreign tax rate currently paid by Forest Labs (25 percent), so no additional tax on those foreign earnings is owed Ireland.

The lesson is that U.S. multinational corporations are leaving, in large part for tax reasons. The most immediate effect is a loss of corporate tax revenue. More long term, it reduces investment and hiring in the U.S. There are only two ways the U.S. can stem this tide: 1) Cut the corporate tax rate to somewhere at or below the average among developed countries (25 percent), and 2) Switch to a territorial tax system. The combination would make the U.S. competitive as a place for headquarters and corporate investment, and would also reduce incentives to shift profits abroad.

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The Tax Foundation is the nation’s leading independent tax policy nonprofit. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and global levels. For over 80 years, our goal has remained the same: to improve lives through tax policies that lead to greater economic growth and opportunity.